Internal Revenue Service
Revenue Ruling
Rev. Rul. 56-249
1956-1 C.B. 488
Sec. 61
Caution: Distinguished by Rev. Rul. 80-124
Caution:Amplified by Rev. Rul. 77-347
Caution: Modified by Rev. Rul. 77-347
Caution: Distinguished by Rev. Rul. 61-68
Caution:Amplified by Rev. Rul. 60-330
Caution:Amplified by Rev. Rul. 58-128
IRS Headnote
Under certain circumstances, benefits paid to individuals by trustees of a
trust created pursuant to the provisions of a supplemental unemployment
benefit plan established by M Company do not constitute `wages' for
purposes of the taxes imposed by the Federal Unemployment Tax Act and the
Federal Insurance Contributions Act, or for purposes of the Collection of
Income Tax at Source on Wages. However, such benefits are includible in the
gross incomes of such individuals for the year in which received.
Full Text
Rev. Rul. 56-249
Advice is requested whether benefits paid, under certain circumstances, to
individuals by trustees of a trust created pursuant to the provisions of a
supplemental unemployment benefit plan established by M Company constitute
`wages' for purposes of the taxes imposed under the Federal Unemployment
Tax Act and the Federal Insurance Contributions Act, and for purposes of
the Collection of Income Tax at Source on Wages (chapters 23, 21, and 24,
respectively, subtitle C, Internal Revenue Code of 1954). A further inquiry
has been received as to whether such benefits paid by the trustees are
includible in the gross income of the recipients.
Under section 3306(b) of the Federal Unemployment Tax Act, the term `wages'
means, with certain exceptions not here material, all remuneration for
`employment.' The term `employment,' as defined in section 3306(c) of such
Act, means any service performed by an employee for the person employing
him, with certain exceptions and limitations.
Pursuant to an agreement entered into with O Labor Union, The M Company
established a plan designed to supplement State system unemployment
benefits payable to certain former employees of M Company who have been
laid off by the Company by reason of a reduction in force or the
discontinuance of a plant or an operation.
Under the terms of the plan, M Company is to make, for each pay period, a
contribution to a fund held and administered by an independent trustee
equal to x cents, multiplied by the total number of hours for which its
eligible employees shall have received pay from the company for such pay
period. The company's obligation to make such contributions ceases,
however, whenever the total of amounts held by the trustee in the fund
equals a maximum level determinable under the terms of the plan. The size
of the fund created under the plan is limited to a specified maximum
amount, such amount being dependent upon the number of employees who are in
the active service of M Company and the number of laid-off employees who
have credit units under the plan. No employee of M Company has any right,
title, or interest in or to any of the assets of the fund or in or to any
Company contribution thereto unless and until he is qualified and eligible
to receive a benefit therefrom. M Company's contributions will be
irrevocable; and M Company will not have any ownership therein during the
ordinary operation of the plan, or in the assets comprising the fund. Legal
title to said assets, as well as to Company contributions, rests in the
trustee, who will use the assets solely in the interests of the employees.
Upon a termination of the plan, the amounts in the fund will be used to pay
benefits to employees already or subsequently laid off. The fund is the
sole source of benefit payments. M Company is required to make specified
payments to the fund but is in no way liable for additional contributions
to such fund or otherwise, or for the payment of benefits should the assets
of such fund prove insufficient.
The benefits payable from the fund are to be in varying amounts and for
varying periods, depending on the size of the fund, duration of layoff of
an employee, time worked prior to layoff, amount of State unemployment
benefits available, and the base hourly-rate of the individual employee,
less taxes withheld. Generally, the benefits payable under the plan to a
beneficiary in a State where the amount thereof will not reduce or cancel
State unemployment benefits shall be such sum which, together with the
State unemployment compensation benefit and other remuneration (which
cannot be in an amount equal to or in excess of that amount which would
disqualify the beneficiary for such State benefit), equals the lesser of
(a) a prescribed percentage of the employee's current straight-time weekly
pay after withholding of all taxes and contributions, or (b) w dollars.
The duration of benefits to an individual under the plan is related to,
among other factors, the number of credit units which the individual has
accumulated by reason of his service with M Company. For each week worked
subsequent to the effective date of the plan, each employee is credited
with z units; but he shall never accumulate more than 52 z units. For each
weekly benefit received under the plan, an individual is charged a number
of accumulated credit units, such charge being governed by (a) the level of
the fund at the time of such payment and, if such level is not equal to the
maximum level prescribed, (b) the number of years during which the
individual worked for M Company. That is, if the level of the fund is equal
to the prescribed maximum, all eligible individuals under the plan are
charged the same number of accumulated credit units for each weekly
benefit. If, however, the level of the fund is less than the maximum (but
more than a minimum below which no payments may be made from the fund), the
number of accumulated credit units charged an eligible individual for each
weekly benefit payment is determined on the basis of the number of years of
continuous service with M company. No benefit can be paid from the fund to
any individual who has no available credit units. Any unused credit units
are cancelled at the expiration of y months of continuous layoff.
The plan specifies the particular conditions under which benefits are
payable. Benefits are paid only to former employees who have been laid off
because of certain enumerated conditions such as a reduction of the working
force or the discontinuance of a plant by M Company. Furthermore, benefits
are payable only after a `waiting period' of v weeks. However, neither
layoff nor resulting unemployment alone is sufficient to entitle a former
employee of M Company to benefits. Nor are benefits payable to employees
who, although not in a work status during a particular week, are in a
`standby' capacity in the sense that their availability for work is limited
to M Company.
To be eligible for a benefit, a former employee must report to and register
for employment with the State Employment Service. All requirements of State
unemployment compensation laws designed to limit the payment of benefits to
individuals who are `unemployed' and genuinely available for any suitable
work are incorporated as eligibility requirements for the receipt of
supplemental unemployment benefits from the fund.
While a prior period of service with the employer is required in order that
an individual be eligible for benefits, the mere existence of such prior
relationship, as such, does not establish such individual's eligibility for
benefits. His eligibility is also dependent on his continuously meeting
conditions subsequent to the termination of his employment with M Company.
During this period of unemployment, an individual must be continuously able
to work and available for work and he must continue to meet specific
periodic reporting requirements. He must satisfy other specific conditions
which are applicable at all times when unemployed. He is ineligible to
receive supplemental unemployment benefits from the fund if he is
ineligible to receive or is disqualified from receiving State unemployment
compensation benefits, except in three limited situations, viz., where he
has insufficient wage credits under the State law, where he has exhausted
the duration under the State law, or where the State law requires `a
waiting period' of more than v weeks. But even in such cases, supplemental
benefits are payable only if he would otherwise have been eligible for
State unemployment compensation and also has complied with the other
conditions incorporated in the plan. If by reason of the payment of such
supplemental unemployment benefits, however, an individual would be
ineligible to receive State unemployment benefits, the plan provides for
the payment of a substitute benefit.
Similarly, although payments by M Company to the fund are measured in part
by total hours worked by all employees, eligibility for benefits does not
depend on whether contributions have been made with respect to hours worked
by a specific employee. A former employee may receive benefits although no
contributions have been made during the entire period of his employment
with M Company (contributions are not made when the fund reaches a
specified level). Conversely, a former employee, on the basis of whose
employment contributions have been made to the fund, may not be eligible to
receive benefits when unemployed, because of his failure to satisfy the
conditions of eligibility during his period of unemployment or because the
fund is then below a certain specified level.
Under the plan, the amount of supplemental unemployment benefits paid from
the fund is dependent on many conditions. The plan does not provide for a
benefit fixed solely on the basis of an individual's prior earnings. The
amount of the supplemental unemployment benefit paid from the fund to any
former employee depends on the size of the State unemployment benefit to
which he is entitled and the amount of other remuneration received which is
allowable under State unemployment compensation law, his marital status,
the number of his dependents, as well as his wage rate at the time of
layoff. An individual who is eligible for a supplemental unemployment
benefit will receive a weekly benefit (not in excess of w dollars) in the
amount necessary to supplement his State unemployment benefit, plus other
allowable remuneration received, up to a state percentage of his straight
time take-home pay.
As observed above, the period for which benefits are paid to a laid-off
worker who meets the conditions of eligibility is dependent upon the fund
position. When the program is in full operation with the fund at the
maximum level, all employees with one or more years of continuous
employment with M Company since the effective date of the plan are entitled
to the same potential duration of benefits. However, if the fund position
is less than a stated percentage, the laid-off employee's seniority becomes
a factor in determining the period for which benefits are paid.
An analysis of the information presented discloses that pursuant to the
supplemental unemployment benefit plan (1) the benefits are paid only to
unemployed former employees of M Company who are on layoff from the
Company; (2) eligibility for benefits depends on the meeting of prescribed
conditions subsequent to the termination of the employment relationship
with M Company; (3) benefits are paid by the trustees of independent trust
funds; (4) the amount of a weekly benefit payable under the plan is based
upon (a) the amount of the weekly benefit payable under the appropriate
State unemployment compensation laws, (b) the amount of other remuneration
allowable under such State unemployment compensation laws, and (c) the
amount of straight-time weekly pay after withholding of all taxes and
contributions; (5) the duration of weekly benefits payable under the plan
depends upon a combination of (a) the number of accumulated credited units,
and (b) the fund position; (6) a right, if any, to benefits does not accrue
until a prescribed period after the termination of the employment
relationship with M Company has elapsed; (7) the benefits ultimately paid
are not attributable to the rendering of particular services by the
recipient during the period of his employment; and (8) no employee has any
right, title, or interest in or to any of the assets of the fund or in or
to any Company contributions thereto until such time as he is qualified and
eligible to receive a benefit therefrom.
In view of the foregoing, and on the basis of all the facts and
circumstances set forth herein, it is concluded that the benefits paid to
former employees of M Company under the terms of the supplemental
unemployment benefit plan do not constitute `wages' for purposes of the
Federal Unemployment Tax Act.
It is also concluded that the benefits paid to former employees of M
Company under the terms of the supplemental unemployment benefit plan do
not constitute `wages' for purposes of the Federal Insurance Contributions
Act and the Collection of Income Tax at Source on Wages.
Notwithstanding the foregoing conclusions, it is further held that the
benefits paid to former employees of M Company under the terms of the
supplemental unemployment benefit plan are includible in the gross incomes
of such former employees for Federal income tax purposes for the year in
which received.
